When you’re partnering, a new partnership audit regime will take effect in 2018. These new rules will change the way partnerships and partners owe taxes. If your business is a partnership, you need to plan for these changes.
Here are a few things about the audit regime that might affect you:
Partnership Audit Taxes
Under the new rules, unless a partnership takes the proper steps, taxes owed as a result of amendments to a partnership return or an audit will no longer be payable by the partners themselves. They will instead be payable by the partnership entity itself.
You Might Be Able to Opt Out
If your partnership qualifies as a “small partnership.” Partnerships with 1) fewer than or equal to 100 partners, such as those found in S corporations or with 2) no partners who constitute partnerships, trusts, estates, nominees, or disregarded entities. If able to elect out of the new rules, each partner will need the IRS to audit them in order for their taxes to be adjusted.
Shifting Liability
If a partnership is unable to elect out, it may still be able to shift liability to those who were partners during the taxable year for which an adjustment was made. However, doing this might require additional amendments to the agreement.
Indemnification Provisions
Partnerships and their partners can also choose to deal with the liability for taxes that result from any adjustments contractually. They would have to use indemnification provisions in their partnerships agreements. These indemnification provisions may require any individuals who were partners during the taxable year to which the audit relates to pay their pro rata shares of the taxes to the partnership.
Tax Matters Partner vs. Partnership Representative
The new rules also favor partnership representatives over the usual tax matters partners. A partnership representative, who is not necessarily a partner, unlike a tax matters partner, will be the sole authority acting on behalf of the partnership. If a partnership does not name its partnership representative, the IRS will designate one. This is another matter that partners and partnerships might wish to address in their partnership agreements.
As you can no doubt see, the new partnership tax audit regime is complex. Because it would be impossible to summarize what these new rules entail for your business, we suggest that you talk to a professional.
Need help understanding the new rules for partnership and audit? Contact us today for a no-obligation consultation. Se habla español. 305-858-4512